Hot Cartoon Makes Understanding Credit Crisis Simple And Fun

By Ben PopkenFebruary 20, 2009

This a freakin’ awesome cartoon that explains how the credit crisis began, played out, and exploded in our face. I know you’ve seen and heard a million of these by now, but this one is highly visually engaging and entertaining, enough so I could see it being used in the classroom and kids not getting (too) bored. Graphic designer Jonathan Jarvis. Especially good is how it explains leverage.

It does miss out on a few details, like how shady mortgage brokers would push even prime borrowers into subprime mortgages because the fees were better. Or how BBB rated CDOs would also get split into their own tranches, with the top one getting a AAA rating just like the one the BBB was derived from. But you have to streamline some of the information to make a compelling 11-minute information, and whatever is lost in fine-grain is made up for in lucidness.

I have to agree, a good 10 minutes spent understanding the situation. I knew slightly what was going on beforehand, but now have a better understanding of how the risky borrowers and investments banks worked.

@xaksei: This is a great piece and I think lots of us educators would love to make such things. The problem is always the money and resources for production – which is why the education sector often has to wait for the private sector to develop some kind of interesting tool (like a video game, for example) and then figure out how to adapt it to educational use.

That said, there are lots of design principles involved in something like this that teachers could use without a lot of capital.

@TheRedSeven: Hardly, the champagne analogy in Hirsch’s CDO piece was much better than liquid flowing from box to box. That being said, I enjoyed this one as well. I guess it’s a “do I prefer Richard Burton or manga” sort of a preference.

Can someone verify the accuracy of this info. Granted, I am quite naive and have gotten lost before while trying to understand the debacle. If this guy put up a fairly accurate representation of what’s sinking us, I say by tonight MSN, FOX, CNN, and the rest of these news organizations should be slapping these videos on their news feeds.

Again, if it is ACCURATE (I know details may be missing, but as a general overview, correct) , then this is hella informative and should be seen by as many Americans as possible.

@BriceCairns: There’s some parts left out (the credit default swaps mentioned during the explanation of the CDO but then never heard from again. These were what sunk AIG), and some parts glossed over. TheoboldLeda took issue with the term subprime mortgage, since it wasn’t quite used right. The brokers made higher commissions on the weird mortgages than the standard fixed-rate mortgages, and with a few exceptions, just being weird doesn’t make the mortgage subprime.

It would be helpful to have a better definition of “subprime”. I’m sure plenty of people would rather leave the “irresponsible smoking daddy” in there but at some points during the crisis, the foreclosures on non-owner-occupied properties (such as summer homes, house-flippers’ investment properties and rental units) were neck and neck with the foreclosures on men with beer guts and lots of kids. Because part of “primeness” is a reasonable debt-to-income ratio, the investors with four or five interest-only Option ARMs were all deep in subprime territory.

Just to clarify, the comment “like how shady mortgage brokers would push even prime borrowers into subprime mortgages because the fees were better” is incorrect. There is no such thing as a subprime mortgage. Borrowers can be prime or subprime based on their credit history, but the actual mortgage product can’t be classified that way. If someone with a perfect credit score takes out an adjustable rate mortgage or even a negative-amortization mortgage, that does not not make the mortgage subprime. Similarly, if someone with a horrible credit score gets a 30-year fixed rate mortgage, that does not make the mortgage ‘prime’. People who got pushed into mortgages that generated higher fees for brokers were not being shifted from prime to subprime, they were being moved from one type of mortgage product (fixed rate) to another type (ARM, neg-am, etc).

@TheoboldLeda: Ben Bernake seems to think that there is such a thing. In fact, searching the Federal Reserve Bank’s website for the phrase yields over 1,000 results.

In any case, it’s a handy reference phrase to distinguish between loans that are more favorable to a borrower over time (like a 5.25%, 30yr fixed rate) and less favorable to a borrower over time (like a 1% 1/1 Option ARM that will readjust to 1yr LIBOR +8 after the introductory period ends).

Word of the Day: Tranche, n. A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time, but have different risks, rewards and/or maturities. “Tranche” is the French word for “slice”.

I just realized that even though this is being called the credit crisis, I have yet to see any data, just headlines and buzzwords. Have any of you found a resource for reliable data that suggests this really is a credit crisis for the ages?

@deep.thought: I suppose in a few years some financial writer will write an article (maybe a book) that briefly summarizes the impact of the credit crisis on this country. Until then, the Federal Reserve Bank has some neat dynamic maps that will let you view things like mortgage delinquency and bank card delinquency rates. The FDIC’s Division of Research and Statistics also publishes working papers on various aspects of the economy (check out the Industry Analysis tab).

The only problem I had with the video is that it didn’t get into the risk management that the lenders got into for the subprime markets that accelerated the process: the ARMs, interest only’s. It’s one thing to loan to sub-prime people, it’s another to give them a mortgage that they will not be able to afford. (I never understood the concept of making someone riskier pay more for something than someone safer…it seems like you’re setting yourself up for failure if you make someone pay 9% instead of 5% because they couldn’t pay something back. Either loan the money at a good rate, or don’t loan them the money)

Also I didn’t like that they even mentioned that people were bailing on their mortgages because their houses dropped in value. I don’t think that happened very often…often enough to dedication the amount of time that it did to it.

@snowburnt: One other problem I had, kinda minor, I felt like the other part of the collapse was when everyone defaulted and the banks called in the insurance. The insurance companies all collapsed under the strain as well, but when things were good, they made money on the default and the foreclosure

Excellent excellent video! You correctly point out how excessive debt and passing out the risk to others caused this crisis.

My one criticism is that you mentioned CDSes earlier in the presentation but you never touch on it again. You could have spent another minute or two to exlpain how CDSes greatly amplified the damage by increasing the liabilities that banks had on these unregulated “insurance policies.”

I love the “less responsible” homeowners! 4 kids, mom and dad both smoke, Dad’s holding a beer bottle. One thing I don’t get tho – the “less responsible” dad is really fat, but his “less responsible” wife is still nice and thin. I call BS!

This is a superb piece of work and I agree that all
Americans should see this as it shows what the greed
of investors and investment banks has done to us all.
I say take out the unhealthy ones and use the others
for food.

@LaniNiger: @LaniNiger: What about the greed of the irresponible money borrowers? The irresponsible dads and moms depicted are as much to blame because they should know that they cannot afford a $300k+ house. Just because something is on sale doesn’t mean you should buy it.